Part B: The Financial Reporting Framework Flashcards
Accounting framework definition
Sets out the concepts which underlie the accounts. It means that basic principles do not have to be re-debates for every new standard
Purpose of the IASBs framework for the preparation and presentation of financial statements
- serves as a guide in developing accounting standards
- serves as a guide to resolving accounting issues that are not addressed directly in a standard
Components of the framework (what does it look like?)
- objective of financial statements
- underlying assumptions
- qualitative characteristics of good information
- elements of fs
- recognition of elements
- measurement of elements
- concepts of capital
Arguments for a conceptual framework
1) has highly practical aims
2) without it standards would be developed without consistency and same basic principles would be continually examined, with potentially differing conclusions
3) is the solid foundations upon which everything else relies
4) without it, a rules based system would be the alternative. Rules get added as situations arise and eventually become cumbersome and unadaptable
5) prevents political lobbyists from pressuring changes in standards
Conceptual framework provides for…
What should be brought into the accounts
When it should be brought in
How much it should be measured
Arguments against a conceptual framework
Difficulty in agreeing one set of principles for all
Different info is needed for different users and so they will need different measurement bases and principles
Even with the framework- standards go through a huge analysis process
Fundamental characteristics
Relevance
Faithful representation (substance over form)
Enhancing characteristics
Comparability (including consistency)
Timeliness
Reliable information
Verifiability
Understandability
Understandability is enhanced when the info is
Classified
Characterised
Presented clearly and concisely
- However should not be excluded solely for being too complex
Two constraints that limit the info provided in useful financial reports
Materiality
Cost-benefit
Faithful representation means
1) Substance over form
2) represents the economic phenomena
3) completeness, neutrality & verifiability
What makes a good measurement method?
Benefits should justify the costs
Should be the minimum necessary to provide relevant info
Should mean infrequent changes (necessary changes clearly explained)
Same method for initial and subsequent measurements
What methods of measurement do IFRSs use?
Historical cost
Present value
Fair value
Net realisable value
Current value methods
Market value
Value in use
Fulfilment value
Asset definition
A present economic resource controlled by the entity as a result of past events
An economic resource is a right that has the potential to produce economic benefits
